The S&P 500 (S&P), Dow Jones 30 (the Dow), and NASDAQ are stock indexes that measure the 500 largest U.S. stocks, 30 large blue-chip companies, and major tech companies, respectively. To effectively track their benchmarks, these indexes must be rebalanced, or reconstituted, typically on an annual basis, so that each reflects the stocks in the index it attempts to mirror by size and style.
Every year, on the last trading day of June, the Russell 3000 Index—measuring the 3,000 largest U.S. companies—is reconstituted. In 2024, a notable addition to the Russell 3000 was Dell Technologies, Inc. [DELL].
Investors may be confused as to why the stock of a company with a household name and a $98 billion market value was not already part of this broad U.S. stock market index.1 Dell was dropped from the index during the 2023 reconstitution due to Russell’s eligibility rules. (Part of the Russell 3000 Index methodology for security eligibility is that 5% of the company’s voting rights must be held by “unrestricted” shareholders. Dell did not meet that threshold in 2023.) Its reinstatement in 2024 signals it once again meets the requirements for inclusion.
Russell 3000 Index fund investors should be concerned about Dell’s performance during its one-year exile. During its time out of the Russell index, Dell’s stock posted a cumulative total return of 177.5%—more than seven times that of the Russell 3000 Index, which returned 24.6% during the same period.
This missed upside is another example of how index rules and procedures can drive a wedge between what the market offers and what index fund investors receive, particularly if the rebalance is conducted only once a year, as is the case for Russell.
We wrote about an alternative to both active and passive management in Active vs. Passive Management: Why Making More Trades Doesn’t Equal More Value. In this piece, we explain the more flexible JLFranklin investing strategy, whereby our clients get broad diversification at a low cost. What happened to Russell 3000 investors over the past year speaks to the importance of knowing what you own, and that investing in an index may not provide all the opportunities you expect and deserve.
Footnotes
- Market value as of June 27, 2024, as reported by FactSet.
